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John Warrillow: You know, on this show I’m always crapping all over private equity, but to be fair, there are some good private equity companies out there. And I consider John Dalton one of the good guys. John is our next guest. He started a company called Industrial Device Investments and what’s interesting about John is he started with Black & Decker and GE, so he’s got operational experience. You’ll see in this interview how he used that to buy a company, ultimately, 3X’ed his money in 18 months. A pretty cool outcome for John. And I thought it’d be interesting to interview John for you, so you can kind of get inside the head of a private equity buyer, sort of visualize what they see when they’re looking at your business, the kind of deal that they’re looking to structure if they go and buy your company, what makes you attractive to them. It’s not for everybody, but certainly a private equity deal can be, if you find the right PE firm and there are some good ones, it can be a good exit option. And again, John, I think, does a pretty good job of getting you inside the head as what he sees when he evaluates a potential investment.
John Warrillow: Here to tell you the rest of the story is John Dalton.
John Warrillow: John Dalton, welcome to Built to Sell Radio.
John Dalton: Thank you.
John Warrillow: It’s fun to talk about a company. So tell me about this business, Aerial Access Equipment, what did you guys do?
John Dalton: So Aerial Access Equipment had been around a couple of decades. The founder had been in that industry and then gone off on his own.
John Warrillow: What was the industry?
John Dalton: They were a rental equipment company for large equipment used in the Louisiana industries for oil and gas and construction. So they rented high reach lifts and outdoor fork trucks for construction, stuff like that.
John Warrillow: Oh cool. So if you have a one-off need for one of those things that you kind of roll up on wheels and it goes up super high and there’s a little, you can tell I know nothing about this, but there’s a guy who gets in there and can reach out for something very high? A skyjack? Is that the equipment that you guys rented?
John Dalton: Yeah, it’s that kind of equipment, but envision people who are fabricating oil platforms that are going to go into the Gulf of Mexico, and they need to be able to reach to do all the fabrication, that kind of application.
John Warrillow: Got it. So if you didn’t need the stuff on an ongoing basis, you might rent it. What would one of these units cost? What would a typical rental agreement run?
John Dalton: Probably 1,000, 2,000 per day and then it would go into the sometimes longer agreements for weeks or months, depending on what the customer’s needs are. I’m not actually sure on the rental, the dollar amount there.
John Warrillow: The first thing I think about is insurance. Your insurance bills must have been through the roof!
John Dalton: Yeah, that’s a definitely a part of cost control was to understand how to manage insurance and how that went up and down with newer equipment or older equipment, and how to manage that piece of the business. There’s a little bit of art to that.
John Warrillow: So you actually didn’t start this company, but you bought it. What made you buy it? What was it about the business that made you think this is a cool business, I wanna own it?
John Dalton: Yeah I think on the buy side, you’re buying into people and that’s either an existing team that’s there or a team that you can build with a business, but products and markets can change, good people are hard to find and hard to keep. So finding a team that you think can execute well is always in the mind of a buyer.
John Warrillow: I guess my first thought is, but wait a minute, you’re gonna lose the team the moment you buy the business, right? You’re buying out the owner, so I’m assuming the owner hits the beach and you lost the team or at least the quarterback of the team, no?
John Dalton: Some owners hit the beach. Many owners do not. So in that experience, our owner stayed about five years, which in this particular case, was longer than we were in the deal.
John Warrillow: So you liked the owner and the team, but what else did you like? Give us a sense of the metrics of the business. Like how big was it? How much either revenue or profit? Just give us a sense is it thousands of employees, ten employees.
John Dalton: No, it was about 25 employees and probably eight million in revenue, a million, million and a half in profit when we started.
John Warrillow: So how did you figure out what it was worth?
John Dalton: So there’s a few different ways to look at valuation. In this case, you’ve got two that apply. One is kind of the central way people would value companies, which would be in a multiple of earnings. The other case, in this case, it was an asset intensive business, so you could look at asset value as well. So it was a combination of those two.
John Warrillow: Because you had a lot of these cranes and the equipment was worth a lot of money.
John Dalton: Yeah.
John Warrillow: How was the valuation on a multiple of EBITDA versus the asset, which ended up being the higher valuation?
John Dalton: I think earnings and EBITDA always rule. But in an asset intensive business, like, you know, a rental company, then the value of the equipment certainly plays in at a secondary level.
John Warrillow: So give me a sense of, and if you can’t share the exact valuation for Aerial, you can certainly talk to me in general terms about either kind of a service business or a rental business with some assets, how would you typically value that? Is it multiple of EBITDA plus assets? Just give me a sense of the market.
John Dalton: Those would be two different approaches that would hopefully converge on a similar evaluation. But, you know, with EBITDA you’re looking at cash generation and a multiple there would certainly be applicable.
John Warrillow: Okay. Yeah, because my sense is that generally you can’t mix valuations. Either you’re gonna use an asset valuation, in which case is the value of the assets, obviously, or you’re using some sort of either comparables or multiple EBITDA or discounted cash flow, which would be a separate, so you’d argue that the assets are required to generate the profit and therefore you can’t double count them.
John Dalton: Yeah, you’re not double counting, you’re trying to converge both methods in this case on what you think is the right valuation.
John Warrillow: Right. So let’s just imagine, and again, I’m assuming you can’t speak directly about Aerial, in terms of what you paid?
John Dalton: Correct.
John Warrillow: Okay, so let’s just imagine a business that has a million dollars in EBITDA, a hypothetical business, and also has $4 million of assets. You know, what would you, so again, depends on the industry, et cetera, but let’s imagine you were thinking of paying say 5X EBITDA, so on a multiple of EBITDA, it’s worth 5 million. On an asset, it would be worth 4 million. And therefor, as an investor, you’re looking at it and saying, “Well, either way you look at it, they’re pretty close.” Am I getting roughly you’re thinking?
John Dalton: Yeah. That’s exactly right. You’re trying to converge there on what you think is the right, you know, valuation to bid.
John Warrillow: Right, right. And Warren Buffett always talks about, you know, this idea of buying companies, I believe he says when the book value, it’s actually below, is it below the intrinsic value that he buys companies?
John Dalton: Yeah, I don’t quite understand his methods there. I respect Warren Buffett a lot of course, and I don’t quite know how he gets to that part of his financial assessment.
John Warrillow: Someone will have to explain it to me because it goes way beyond my head. Oh, we’ll have to get Warren on the show, that will be what will do.
John Dalton: Yeah, there you go.
John Warrillow: So this is helpful. So you’re looking at a company and you’re saying multiple of EBITDA, you’re gonna pay X, if I just look at the assets value I’m Y. And, I guess, from an investor perspective, my assumption is that if the value of the company is not far out reaching the value of the assets that gives you more confidence in making the purchase. Because clearly there’s something to fall back on if the EBITDA doesn’t materialize. Is that generally the-
John Dalton: Yeah. That’s a good, I think that’s a good way to look at it. But only for an asset heavy business like a rental equipment company. I mean, we could find other examples of heavy, you know, asset intensive businesses, but for many, if you bought a company that assembled a particular product, that might not take very much assets. So asset valuation might not play into it very much at all.
John Warrillow: Yeah, like at an IT company, for example. Or a software company where there’re very few assets. Okay, that’s helpful. But for you, that gave you a sense of comfort knowing that the value you were paying was not far in excess of the value of the assets essentially?
John Dalton: It was both comfort and it’s one of the things assets are helpful for is how you can finance it.
John Warrillow: Tell me more about that.
John Dalton: So if you had, in your hypothetical example, if you had $4 million of assets, then those assets are worth something for collateral, for financing. So it’s easier to buy that company with the $4 million of assets because it can be collateral.
John Warrillow: What percentage of the assets would you expect a bank to finance?
John Dalton: Well with real estate, you know, it would usually be 70 to 80 maybe 85%. Equipment, a little bit less. In this case with rental equipment, I think we were right around the 80% mark.
John Warrillow: Got it. So when you looked at Aerial as a potential investment you said, “I could buy this company. And look, I got some assets to fall back on,” number one. Number two, “I can finance the purchase or at least a portion of the purchase price because of these assets as well. I like the team and the founder is willing to stay on.” What other things did you like about Aerial?
John Dalton: I think the market we saw is promising. At that time, oil and gas was going pretty strong and the opportunity for all, this is a Louisiana based business that did a lot of oil and gas infrastructure work, and so we thought there was good opportunity in that market.
John Warrillow: And so were there other bidders at the table when you went to buy the company?
John Dalton: There were. In fact, we lost the first round. And the buyer that won was not able to close, was not able to, I don’t know, I guess it was financing. And so we re-engaged. And the second time around, we’re able to get the deal closed.
John Warrillow: So how many folks got to the sort of dance in the first round? You were there, there were the guys who originally got the deal but weren’t able to finance, how many other folks at the table?
John Dalton: Probably two or three. I don’t really have any specific data on that. But based on all the discussions and war stories then there was something like that.
John Warrillow: Yeah. Yeah. And how did you ultimately prevail?
John Dalton: I think there was buy in to what we could do to help the company, both from its strategy and its operations, strategy, finance and operations. So that was sort of my part at the private equity fund. I spent some time being a private equity and investor type role, but most of my career is around company operations.
John Warrillow: Because you worked at Black and Decker, Black and Decker and some of the big industrial companies, as I recall. Where else did you work? I’ve forgotten.
John Dalton: So I started at GE Plastics.
John Warrillow: Right.
John Dalton: They’ve sold that business off since, but it was about a $6 billion division of GE with thermal plastics products. Went back to business school, went to Black and Decker in the manufacturing management. And was a series of smaller companies before I got into the M&A world.
John Warrillow: So in this business, Aerial, what did you see from an ops perspective?Wearing your Black and Decker, GE hat, where did you see you could pick up some extra value if they applied what sort of strategies or ideas that you could add some value?
John Dalton: You know, at Black and Decker, we were manufacturing bench top power tools, so miter saws and table saws under the Dewalt trade name.
John Warrillow: I think I have a few in my garage, actually.
John Dalton: I hope you do. So, you know, what I learned was it didn’t really apply that much. It wasn’t really a sort of quality control, lots of data tracking operation that they needed. It was really more around great maintenance, reactive maintenance, some proactive and preventative maintenance, but the statistical Six Sigma quality control type stuff that you see in volume factories really didn’t apply to the rental equipment business.
John Warrillow: So going back to Aerial, when you came to the table, you’re like, “We can help them with strategy, we can help them with financing, we can help with with ops.” Specifically around ops, operations, where did you see there was maybe efficiencies to gain?
John Dalton: They were not doing really any preventative maintenance to speak of. And we helped them with some vibration analysis tools and some other ideas to try to find a failure before it broke.
John Warrillow: Right.
John Dalton: That was our main effort.
John Warrillow: Got it. These things would cost a fortune to fix or replace, I’m assuming. It’s like an airplane. If you can fix the problem before it becomes a major problem, then you save millions, tens of millions.
John Dalton: Sure. Any big equipment is that way.
John Warrillow: So you’re helping kind of professionalize the way they did preventative maintenance?
John Dalton: Yeah. And, you know, that’s an example of where smaller companies need help from an investor’s perspective. And a couple of the companies I’ve been involved with then, you know, you have great operations team and maybe strong engineering and product, but they don’t have, you know, very good selling methods. So, you know, you work on what needs to be worked on.
John Warrillow: Yeah. So from a finance perspective, again, I’d be curious to know what you saw the opportunity to be. How could your inclusion in the mix help from the financing perspective.
John Dalton: So I was the operating guy, my partner was the finance guy. And so it would be his skills that were primarily applied there. Part of it is getting financing done well and at the lowest cost for the initial deal. And then there’s, you know, that business is so asset intensive and so capital intensive that being able to manage that banking relationship as equipment is coming in and out and as the company is growing and needing more capital, then managing that financing relationship was very important.
John Warrillow: Got it. Yeah, because of course this equipment would be financed. They’re not buying these cranes out right, I’m assuming.
John Dalton: Usually not. In that case, we had a financing package that was across the company. So we weren’t financing each individual piece of equipment, but we had, you know, banking and sub debt relationship that was a related to the whole purchase of the company. And as the company went up in size, then our financing capacity would go up as well.
John Warrillow: Got it. Can you define sub debt?
John Dalton: So in the capital structure of companies you have, the sort of highest risk area would be equity and the lowest risk area would be bank financing or senior financing. Sub debt fits in the middle. It’s some of the risk of the equity but typically lower prices.
John Warrillow: Got it.
John Dalton: So the ‘sub’ comes from the word subordinate, so it’s subordinated debt to the senior bank facility. So if you had a line of credit or equipment financing, those are senior debt. Typically, senior debt arrangements and the subordinated debt has a second lien behind the senior debt.
John Warrillow: Okay, so I think I get what sub debt is, or subordinate debt. How did that play a role in this Aerial transaction?
John Dalton: Only in the sense of, you know, the entire capital base for the company, you’ve got equity, sub debt and senior debt. And we tried to manage that to optimize. We didn’t want to minimize the equity, but we weren’t interested in investing more than we needed to. And then on the other side, using leverage is good, but over leverage is bad and painful. So there’s a balance.
John Warrillow: I guess I get it at a 30,000 foot level, but I’m still a bit hazy on the specifics. So you’re, from an investor perspective, trying to put as little cash into the deal, capital into the deal, and try to get as much senior debt, bank debt, essentially, so that the most economical debt is used and you maximize, essentially, your return on investment. Am I getting that part at least right?
John Dalton: Yes, but if you use as little equity as you can and you use too much maximization of debt, then you take on a lot of risk. So there’s a balance there of sort of the right amount of equity and debt to maximize return and moderate risk.
John Warrillow: And how do you figure that out?
John Dalton: You know, that’s a good question. I asked when I started with the private equity fund, I asked my partner that and he chuckled and said, “You just have to kind of know.” And over time of giving a mix of how models look and what you think of the stability of the company, and there’s a whole variety of factors that go into that, and I don’t have a good answer for what the right mix is. It depends on a lot of different things.
John Warrillow: Got it. And so let’s get into the actual sale because you put money into this deal, you bought the company, where does it go from there? Because, ultimately, you sold it. Maybe let’s turn our attention to the sale of the company.
John Dalton: Okay, so in this case we were a small private equity fund in Atlanta and we had co invested with another private equity fund in Atlanta in cooperating on the deal. And over time, it became clear that this was a company that would be better run, you know, with one company, with one investor in charge. So we had a buy, sell arrangement with our co investor. And in that case, the buy, sell was structured so that you if you triggered the clause, then you would make an offer that you had to be comfortable either buying or selling under the terms that you had offered. So one party would offer and the other would decide whether they wanted to buy or sell. And in that case, my partner and I decided to sell.
John Warrillow: So did you initiate the buy, sell and come up with an offer price?
John Dalton: I would say it was pretty mutual on the idea that things could work better with a single owner. The other private equity fund was more interested in expanding in that industry. And that wasn’t really an interest of ours. We wanted to have more of a diverse investment base. So it was the right thing for our purposes to sell at the time.
John Warrillow: Got it. And so just specifically the mechanics. So your kind of co investing, was there a trigger, like a heated conversation where they’re like, “But we want to triple the size of this thing and you don’t want to.” Do you remember what triggered the conversation about, well, maybe we should just look to part ways?
John Dalton: Yeah, I think it was over time. You know, we had two board members each from the two funds and then the seller, who stayed with the business for a long time, was the fifth board seat. And I think over time, we just got to the kind of mutual agreement that it would be better off for one firm to be the primary investor. So there wasn’t a heated conversation. There was a point at which the buy, sell had to get triggered.
John Warrillow: Tell me about that.
John Dalton: That was the partner from the other fund approached my partner and said that, you know, they just, we’d had discussions around the topic, we’d never really addressed it directly and he said they decided to address it directly and they were gonna make an offer.
John Warrillow: Got it. So what was your reaction when you saw the offer? And to be clear, this was an offer to buy the business from you?
John Dalton: Or an offer upon which we could buy their share of the minimum. So that’s the Buy, Sell mechanism there that was used. So we were pleased, it was a very good return on our investment. We about tripled our money over 18 months, which doesn’t happen very often. So it was a good offer from our standpoint and based on the idea that the other fund wanted to have other investments in the industry and that we wanted to diversify. To us, it just made sense that we were the one to exit.
John Warrillow: Got it. And so you in turn accepted their offer?
John Dalton: Correct.
John Warrillow: What kind of negotiations were involved? Did you guys hack through deal terms or did you try to kind of get them to increase their offer? Or was it sort of this is the offer, take it or leave it?
John Dalton: Yeah, the negotiation really took place before then. When we did the deal, then we constructed the buy, sell. So it was sort of pre negotiated, not the price but the sort of terms and how a purchase of one by the other would work. So there wasn’t any haggling on that. You made the offer, you had to be willing to buy or sell under that offer. And that was sort of the bulk of the discussion. The rest of it was legal documentation.
John Warrillow: If you were advising an entrepreneur who is considering doing a buy, sell agreement with a partner, what sorts of things should they contemplate before papering that deal? In other words, what sorts of things with would they need to incorporate into that agreement before signing it?
John Dalton: I think there’s lawyers that make a pretty good career out of this and books written on the subject. So I’m not sure I would rely on my comments here as necessarily very complete advice. But I think the ideas, while things are good, work out how you would separate. And don’t wait until after you have a problem to have to have that discussion.
John Warrillow: Sure. I think that sort of wisdom, at a 30,000 foot level, I’ve sort of heard before. I’d be interested though, specifically, what sorts of things would you want to work out? Clearly, the price is not something you necessarily work out because that’s what triggers the Buy, Sell, but the terms under which you would separate. What sorts of things would you make sure where there?
John Dalton: When you’re constructing the buy, sell?
John Warrillow: Yeah.
John Dalton: So many times the price is not ambiguous, or at least the say a multiple is not, so you could argue that one could sell, you know, buy the other out at a five multiple of EBITDA or something less cash, maybe in post debt. So there’s different structures there. I grew a strong, I really liked the way that it worked with our partner on that, where you were comfortable. We didn’t have to negotiate price before we knew anything. And so at the point, this is 18 months later, the price was assessed by our partner, the buyer. But the structure of the Buy, Sell was already there. So we didn’t really need to do a lot to affect the transaction. The structure of it made it very clean. So I would, I guess, my advice would be to make it simple and clean, such as that. And I didn’t author that. So it’s not my structure. It just worked well for us.
John Warrillow: Got it. So I assume that you put in a relatively small amount of capital, used quite a bit of debt in order to buy the company, which enabled you to triple your money in 18 months. Unless the company tripled in size, that would be, I think, the only way you would actually get that sort of return. Am I getting that part about right?
John Dalton: Yeah. Yeah, we had done well over the 18 months, which certainly hadn’t tripled. I think it had grown about 20% a year because we brought in some new equipment and it enabled the company to grow. So it certainly hadn’t tripled, the company hadn’t tripled in size, but so it’s the use of the leverage that made the equity worth that much more. We’d been able to pay down some of the debt and in the dynamics of where things were from an earnings basis, had improved, you know, nicely from where we started. But the leverage helps you get more for your equity. That’s for sure.
John Warrillow: Yeah. And the leverage you’re referring to is the money you borrowed from the bank in order to buy the company.
John Dalton: Correct.
John Warrillow: And that was guaranteed, or the collateral the bank used was, in part, the assets of the company because it was a relatively asset rich company. Did the bank also asked for a personal guarantee?
John Dalton: They did not. So it’s a little different negotiating world where it is a private equity fund that really can’t do a personal guarantee versus an individual owner. So it’s a little bit different negotiation there than a sole owner might have.
John Warrillow: Right. But the owner, Gene, I think, carried some equity through the deal, right? Because when you bought-
John Dalton: Yeah, he had some rollover.
John Warrillow: Yeah.
John Dalton: He ended up, I can’t remember exactly what it was, 10 or 15% of the company. He wouldn’t have personally guaranteed, you know, the other 85%.
John Warrillow: Right, right. Would he have been asked to guarantee his portion of the debt? If you know what I mean. Like if he’s 10% shareholder after the money came in. Would that 10% have been personally guaranteed?
John Dalton: No. I mean, the company is either doing well and not in violation of covenants or it is in violation of covenants. It’s not in violation of 10% of it.
John Warrillow: Right, right. You can see how little I know about using debts to buy companies, but this is fascinating. So how did the founder end up sort of making out in this deal. Clearly, he was able to get 80/85% of his value out when you and your partner purchased the firm.
John Dalton: Yes.
John Warrillow: How did, you know, I’ve heard this term-
John Dalton: We stayed in the deal a year and a half, the founder stayed five or six years. Was able to sell his remaining share to our previous partner. I don’t have any contact with the founder anymore. But, you know, had done reasonably well and had been able to make a successful exit.
John Warrillow: Yeah, I’ve heard this term second bite of the apple before, where the founder sort of holds on a bit of equity and then sells it downstream 3, 5, 7 years later. That sounds like what happened in this case, although we don’t know sort of how it worked out economically for him.
John Dalton: Yeah, I know, I’m pretty sure it worked out economically well. Just from the hearsay. And you’re right. He sold 85% of the company to start with, so he had some financial success even, you know, from the get go.
John Warrillow: Yeah. Yeah. You know, we hear all these horror stories about private equity deals. You know, I’ve probably shared my fair share as well. I guess one question I have is, you know, from your perspective, the kind of stereotypical, you know, perception of a private equity deal is that, you know, the private equity money comes in, bunch of Harvard MBAs come to the table. They think they’ve got hot shot, you know, management theories and they put all this kind of Wall Street theory on to some very small company. The owner bristles under the advice. “How dare you tell me how to run my company, blah, blah, blah.” And it blows up into this, you know, major thing. And the owner feels, you know, stuck because they’ve got equity still in the game. They can’t just say go to hell, but they kind of want to. So that’s the sort of stereotype. Right? And I’m sure you’ve heard it before.
John Dalton: Absolutely.
John Warrillow: What advice would you give owners considering sort of a PE deal or an offer from a private equity company?
John Dalton: Be careful, I think would be my first advice. You know, you got to know sort of the guardrails of what’s the situation. In other words, if your private equity fund has a website that says it typically will exit in five or six years, then it’s not a very good idea to assume that they are gonna own the company for 10. So if your goal is to be there for 10, then you got to realize you’re gonna go through multiple ownerships. And, you know, that private equity is a business like all the businesses. It’s there, you know, it exists because it’s seeking to make a return for its investors. So, you know, the fund will act in its own interest. Just like, you know, all of us do and need to, you know, for our families or for whatever purpose. In that case, it’s for their investors.
John Dalton: There’s a whole nother group of investors that would be called family offices that, you know, on the example I gave for timeframes that don’t have a time frame. Because there’s no driver of institutional, you know, investment in the family office that mandates a five year timeframe for instance. So you have to kind of match what your expectations are with what the character of the fund is. I think, I mean, that maybe sounds too simple. But research and understanding who your co investor is, it’s pretty darn important.
John Warrillow: Yeah, that’s for sure. So that would be referred to kind of on a PE firms website is kind of the whole period? Would that be fair?
John Dalton: Yeah.
John Warrillow: Yeah.
John Dalton: Yeah.
John Warrillow: You know, what other things should an entrepreneur look out for? What other gotchas or sort of mistakes do you see when they agree to a PE deal?
John Dalton: I think Industry Focus. I know of a lot of private equity funds that invest in all kinds of industries and some of them are very successful. But if I was an entrepreneur, I would want somebody that understood my business and understood my industry. So, you know, understanding, you know, for the broad portfolio and for the goals of the fund are those aligned with your company and your industry. And, you know, if you have private equity fund that specializes in a particular industry and that matches your industry, then they ought to at least understand the dynamics of the industry. And that would make thinks easier.
John Warrillow: One of the thing that I’ve often kind of been curious about is how the private equity investor can possibly know more than the founder. Like here’s this guy who has run this company with these cranes to the oil fields for decades. Right? They know every inch of the business, where all the bodies are buried. I mean, they know the business outright. And the private equity company comes in and sort of says, “Oh, well, we’ve got all these, you know, ideas about how we can manage your company better.” How could they possibly know more than the owner who has been doing it for decades? THat’s something I’ve never understood.
John Dalton: They won’t ever know the company as well as the owner would.
John Warrillow: No. Yeah.
John Dalton: But they may know lots of other things that can help or could distract, it depends. So they might know lots about the industry or better ways to finance or possible expansions or, you know, all kinds of ways to help the company. The challenge I think many entrepreneurs have is they don’t have the time to work on their business. They’re only working in the business.
John Warrillow: Like a Gerber expression. Yeah.
John Dalton: Yeah. So, you know, the private equity folks have never, may never have work in a business or may have that experience base, but their charter would only be to help work on the business. If they’re very skilled, then they’ll make that a collaborative effort.
John Warrillow: And how do you as a PE investor, how do you couch advice? Because I can imagine it’s tough because you’ve got an owner who’s, you know, been around the block and you’ve got this advice about using vibration testing to, you know, to check the industrial, the integrity of these machines, whatever. How do you couch that so that it doesn’t fall on deaf ears? That they don’t get their backup saying like, “How dare you tell me how to run this business.” How do you go about that?
John Dalton: So, I guess, sort of, on average, my experience is most smaller business owner or either great operators or great salespeople, and they’re not usually both. So some of that comes from their experience. Some of that just comes from, you know, what their strengths are individually. Our approach has always been to try and help, you know, where they need the help, not in the area where they’re experts. So we wouldn’t try to tell that great operator how to operate his business better because he probably knows well. And, you know, we ought to be able to come up with some metrics to show that or not show that. But at least then, you know, you kind of have some data around what they’re experts at. But most folks are willing to listen when they’re in the part of the business that they’re not experts in and where they can use some help. And that’s usually where the not so deaf ears are.
John Warrillow: Got it. So going back to my original question around sort of what advice you would give to an entrepreneur considering a private equity investor. One thing is to look for their hold period, if it’s got a publicly stated duration. Another is what their industry focus is and make sure that there is some industry focus, if possible. What else would you advise an entrepreneur to look for or not look for?
John Dalton: You know, I think the private equity firm is investing in the people at the operating company, but the operator has to be willing to partner with the private equity fund. So some of that people dynamics to the extent that you can understand the people and be willing to, you know, partner with them is crucial. Like any business deal that’s gonna have something measured in years, if not decades, you got to understand who you’re getting into business with and have ways of managing when there are issues.
John Warrillow: Can you give me an example of a deal? And we don’t have to use names here, but an example of an owner that you were kind of dating with, you sort of checked out their business, you were thinking of making investment and the people dynamics, there was something they said or did that lead you to believe that you couldn’t work with them. I’d love to know a kind of specific example of something that would lead you to believe that people dynamics wasn’t a great fit.
John Dalton: Well, I can’t think of anything there, but I can think of a situation that had gone bad.
John Warrillow: Yeah.
John Dalton: And that is an investment we made with my first company within the Industrial Device Investments. We made an investment for a company that had products in an adjacent market. In hindsight, I looked at the deal as though I was working with a family. And what I didn’t do a very good job of understanding and figuring out about the partnership was the individuals amongst the family. And it turned out that the father and the son in law didn’t get along very well. And we were thinking that the family would get along and, of course, not all families get along. So we had to navigate that. And that is an example that ended up not going so well. They had some industry funding issues as well. And we ended up shutting the business down about two years after the acquisition.
John Warrillow: Family dynamics never seem to end well when they involve family businesses and money. John, I’m so grateful for you and your patience with my questions. I think, you know, it’s great to get underneath some of these deals. We hear all about the PE deals and we talk a lot about it on the show. So it’s great to actually hear from you and some of the things that you think people should look out for and how they should approach it. Is there a way if someone wanted to reach out to you, is there a good way to reach out? I mean, do you accept LinkedIn connections?Or do you have a website?
John Dalton: Yeah, I’m on LinkedIn.
John Warrillow: Okay.
John Dalton: As John Dalton. Our fund is Industrial Device Investments. Our website is idinvest.net. So www.idinvest.net. And my email is firstname.lastname@example.org. So I’d welcome any questions or ideas.
John Warrillow: John Dalton, thanks for joining us.
John Dalton: All right. Have a great day.